Some investors prefer to invest in companies that have an opportunity to increase the value of their market shares in order to double the value of their investment. This is often achieved only by investing in a type of shares known as growth stocks, as they are shares of companies that multiply in value with time faster than the average market shares. They are distinguished by not distributing any profits to shareholders, but rather reinvesting these profits in expanding their investment activities.
An example of this is Amazon company that has not distributed profits since its launch in 1997, although its annual revenues exceed $348b, but due to its reliance on the method of capital growth, the value of the stock has doubled 1854 times, meaning if you invested $1000 in 1997 in buying Amazon stocks, it’ll be $1.854m now.
Also, Facebook, which was founded in 2004 and went public in 2012, achieves annual revenues exceeding $85b, but it does not distribute any profits to shareholders, but rather invests them in expanding its activity, and it grows larger and larger, so the company’s share doubles in value annually, The value of the share in 2012 was around $23, and in 2021 it became $350, meaning that it increased annually by 1.7 times. https://finance.yahoo.com/quote/FB?p=FB
Investing in growth stocks can be a great way to gain wealth. Often a growth company has developed a revolutionary product, innovative service, or new and unique technology that makes it gain a significant market share.
High growth stocks tend to be more expensive than average in terms of metrics such as price-to-earnings, price-to-sales and price-to-cash-flow ratio, yet growth stocks can generate returns that create wealth for investors.
The main features of growth stocks are:
- High prices: Growth stocks are characterized by that their market value is very high compared to the sales or profits that they achieve, and therefore some investors see that the share price is exaggerated, but the nature of this shares is in this way, unlike the value shares in which the share price is corresponded with profits and sales.
- Profit margins: They must have high profit margins compared to the company’s assets and capital. The best growing stocks are those companies that have profit margins that increase over time. Some growth companies may have their profit margins temporarily negative due to the nature of their work, but they become positive in the future.
- Sales growth: Growth companies are characterized by a high rate of sales growth, so that they have the ability to work in many markets around the world in order to raise the value of their sales instead of working in one market, and this is what distinguishes transcontinental technology and technology companies such as Amazon, Google, Facebook, Netflix and Shopify, which are considered among the most prominent growth stocks.
- Growth expectations: Analysts who expect that the company’s profits are likely to grow are considered a positive sign, and although analysts’ forecasts are not always accurate, they are useful for measuring market expectations, such as Zoom’s stocks of the online broadcasting company, analysts expected significant growth for the company’s stock because the market needs it, and in two years it has achieved more than 425% increase in its value. Also, the shares of environmentally friendly companies such as vegan based meat companies and electric cars have achieved rapid growth in their value.
ETFs :
An alternative solution for the average trader who finds it difficult to pick growth companies stocks is to invest through exchange-traded funds (ETFs) managed by experts. There are several funds operating in this field, such as the Vanguard Mid-Cap Growth ETF, which invests in 179 carefully selected companies with growth opportunities. This fund has achieved an annual return on assets estimated at 33.53% in 2020.
Finally, through Baraka’s app, investor can invest in growth stocks without any commission, whether through direct purchase of the most distinguished growth stocks or investing in traded funds that specializes in growth stocks.
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Past performance is no guarantee of future results. Your investment can fluctuate, so you may get back less than you invested. Consider each product’s risk(s) before investing.
Baraka is not a financial adviser and therefore does not provide financial/investment advice. Our content is informational only.
